Dear CEO... we’ve got you covered

The inevitable has happened. After years of expectation, the UK regulator has come down hard on the payments innovators who have helped changed the face of financial services over the past decade.

Thanking them for their contribution to innovation, service enhancements and customer-centricity, a recent Dear CEO letter saw the Financial Conduct Authority (FCA) issue a stern warning that they had best bring their back offices up to the standard of their appealing shop windows, which are so good at enticing users in with their easy UX and multiple tools – and fast.

Addressed to the bosses of e-money institutions and payments firms in March, the letter acknowledged the ‘competition and innovation we’ve seen in the payments sector, enhancing consumer convenience and value’.

But also listed a raft of areas in which their due diligence is falling short, saying, ‘we remain concerned that many payments firms do not have sufficiently robust controls and that, as a result, some firms present an unacceptable risk of harm to their customers and to financial system integrity’ – a risk, it added, that was potentially heightened by the current cost-of-living crisis, which has been shown to increase the incidence of fraud.

The missive’s addressees included challenger banks operating under e-money licences, such as Revolut – which had already had its knuckles very publicly rapped for failings at the end of 2022 –and promises ‘swift action’ if firms fail to follow the guidelines.

The three main vulnerabilities they were urged to tackle without delay, or face undisclosed penalties, include their safeguards against ‘inappropriate funds’ related to money laundering, terrorist financing and, since the outbreak of the Russia/Ukraine conflict, assets belonging to those on ever-growing and evolving international sanctions lists; which it said are weakened by ‘inadequate reconciliation processes’ and ‘lack of due diligence’.

The guidance around such things has been gradually beefed up in recent years, and was made permanent in 2021. In response to the COVID-19 pandemic, it requires financial services firms to carry out statutory audits of their safeguarding procedures, including proper checks of the accounts that funds are held in and due diligence around the customers they belong to, as well as liquidity management, capital adequacy, and robust scenario planning and risk testing.

The Consumer Duty regulation, which is due for to come into force this July, is the latest development focussing minds across the entire financial services industry on best practice. The FCA had already expressed concern at examples of products and services which, it said, do not consistently deliver good customer outcomes and by payment firms who were not acting in customers’ best interests. But in another recent Dear CEO letter specifically about the new Duty, the FCA wrote that it represents ‘a significant shift in our expectations of firms’.

The Duty introduces a more outcomes-focussed approach to consumer protection and sets higher expectations for the standard of care that firms give customers. In the letter, the FCA said that meeting that standard ‘will require a significant shift in culture and behaviour’ by many firms.

So, there seem to be quite a lot of envelopes piling up on the doormats of payments firms, a reflection of how systemically important they've become to the financial system in the UK over the past 10 years. It’s helpful, then, that specialist payment services providers like AutoRek are there to help these firms plug their regulatory gaps.

Glasgow-headquartered AutoRek focusses on reconciliations for financial services and is currently used by firms operating across the asset management, payments, banking and insurance sectors. Its services are centred on helping firms get control of their data and save time and costs through intelligent automation.

AutoRek’s flagship product is a self-contained financial and operational reconciliation solution that uses intelligent automation to eliminate manual processes, perform matching and analyse breaks. This includes an automated reconciliation platform, which is used by some of the biggest names in global payments. Within this, it says, its safeguarding solution is the ‘first of its kind’, helping UK firms to comply with the new FCA safeguarding guidance.

Nick Botha, global payments sales manager for AutoRek, explains how the company seeks to mitigate critical limitations in companies’ reconciliations systems through its flexible solution.

“We are validating clients’ data, we’re transforming their data, we’re providing an integrity layer to that data, we’re providing the reconciliation elements, that control layer, and all in an automated fashion. We’re a central repository for all their management information and reporting; all within the AutoRek suite,” Botha says.

“When it comes to the compliance and safeguarding elements for payments companies, there are three main factors we help our clients with, which I call the three Rs of AutoRek safeguarding. The first is the regulations themselves, the second is the reconciliation requirements, and the third is the relevant funds identification.

“We are able to assist clients in being very flexible in terms of any changes to the regulations. If there are updates by the FCA, or other regulators, that require them to make changes in the platform, it’s not a time-consuming, expensive exercise. It’s driven at the front-end, users making tweaks and changes, and improvements to the configuration, so clients can really stay on top of what the regulations are asking them to do.

“With reconciliations, all organisations are required to perform daily internal and external reconciliations, for safeguarding. AutoRek again provides that in an automated, time-saving, and very controlled manner.

“The third element is relevant funds – it’s difficult for a lot of clients to effectively and accurately identify which funds are relevant funds and which are not. AutoRek has the functionality to automate this process, through rules configuration, through the front end, in a controlled environment.” by performing internal and external reconciliations. And the third was a lack of due diligence and acknowledgement of segregation from credit institutions providing safeguarding accounts. When it comes to this, we have the ability to segregate this data and provide management information (MI) dashboards and reports, per credit institution and per safeguarded account; what the position is, if there is a surplus or deficit in the required and current funds on a daily basis. So, at any given time, payments institutions have a real-time view of whether there’s a surplus or a deficit in their required funds, versus what their current funds are. It covers everything the regulators have identified issues with.”

DON’T FORGET THE CUSTOMER

These systems are tackling the very specific issues highlighted in the FCA’s Dear CEO letter.

“It mentioned a few key factors, when it comes to safeguarding,” says Botha. “The first is firms not having documented processes for consistently identifying which funds are relevant funds – for which I’ve explained what we do. Another was inadequate reconciliation procedures to ensure that the correct sums are protected on an ongoing basis; which is what we cater for

Botha is keen to stress that one thing must still feed into all solution-driven offerings – and that’s the customer experience. He explains: “The end customer journey is at the forefront of everyone’s mind within the payments organisation. It’s not just the front end, it’s all the way to the back end – and if it isn’t, it should be. At the end of the day, customer acquisition and customer satisfaction will drive your revenue growth. It also creates a good brand name in the market for your organisation, and in a very competitive market, you need to make sure that the integrity of your business is looked after, and that customers are saying good things about your business.

“Platforms like AutoRek add value as they can make sure that customer funds are safe. It provides a layer of control for your business, a central repository for all things, end to end, with a complete audit history. This gives your customer confidence that their funds are being looked after effectively.

“Ultimately, speed to issue resolution, making sure that your client funds are safe, and ensuring you’re embodying the newest and best technologies are absolute imperatives.

“At the same time, you need a flexible solution to meet ongoing changes and requirements, across all your different business units.”

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